'''Expected utility''' is the [[expected value]] in terms of the [[utility]] produced by an action. Each possible consequence of the action is assigned a utility by a [[utility function]] and weighed by the probability of that outcome occurring. The sum of these weighed utilities is defined to be the action's expected utility.

'''Expected utility''' is the [[expected value]] in terms of the [[utility]] produced by an action. It is the sum of the utility of each of its possible consequences, individually weighted by their respective probability of occurrence.

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Von Neumann and Morgenstern proved the [http://web.archive.org/web/20070221104329/http://www.econ.hku.hk/~wsuen/uncertainty/eu.pdf expected utility theorem], which says that when a rational agent chooses between different "gambles" (probability distributions over outcomes), the utility of such a gamble can always be seen as the expected utility of the gamble's outcome.

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A rational decision maker will, when presented with a choice, take the action with the greatest expected utility. Von Neumann and Morgenstern provided [http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem#The_axioms| 4 basic axioms of rationality]. They also proved the [http://web.archive.org/web/20070221104329/http://www.econ.hku.hk/~wsuen/uncertainty/eu.pdf expected utility theorem], which states a rational agent ought to have preferences that maximize his total utility. Humans often deviate from rationality due to inconsistent preferences or the existence of [http://wiki.lesswrong.com/wiki/Bias cognitive biases].

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Humans, of course, are a different story.

==Blog posts==

==Blog posts==

Latest revision as of 05:40, 28 August 2016

Expected utility is the expected value in terms of the utility produced by an action. It is the sum of the utility of each of its possible consequences, individually weighted by their respective probability of occurrence.

A rational decision maker will, when presented with a choice, take the action with the greatest expected utility. Von Neumann and Morgenstern provided 4 basic axioms of rationality. They also proved the expected utility theorem, which states a rational agent ought to have preferences that maximize his total utility. Humans often deviate from rationality due to inconsistent preferences or the existence of cognitive biases.